The Massachusetts State Earned Income Tax Credit

By Nancy Wagman, Kids Count Director, March 8, 2018

The-Massachusetts-State-Earned-Income-Tax-Credit

The Earned Income Tax Credit (EITC) improves the economic
security of
approximately 400,000 households in Massachusetts. Over the past few
decades, incomes for many working people have stagnated, in large part
due to economic policies that have de-emphasized the importance of wage
growth. This has made it hard for many working families to keep a roof
overhead, put food on the table, or pay for basic necessities.

A strong state EITC coupled with a strong minimum wage work together to
expand economic opportunity for many working families. The EITC gives a
meaningful boost to the after-tax earnings of thousands of these
low-income working families. This income boost leads to a number of
long term outcomes: children grow up healthier and do better in school,
and parents enjoy greater economic security throughout their working
years and into retirement.

THE EITC DELIVERS LARGEST BENEFITS TO FAMILIES WITH CHILDREN

The EITC is a refundable tax break for lower-income workers. It is
available only to tax filers with earned income, and provides benefits
primarily to workers with children.

The Massachusetts EITC operates under the same eligibility
rules as the
federal EITC. A tax filer's federal EITC eligibility and credit value
depend on marital status, the amount of income the filer earned during
the tax year, and the number of dependent children. In tax year 2018,
the maximum credit for the federal EITC is just over $6,440 for a
family with three or more qualifying children earning $24,400 a
year.1
The value of the credit declines slowly as income
rises, and disappears entirely for families earning just under $55,000.
Very low-income tax filers with no children are eligible for much
smaller credits.2

The state EITC is simply 23 percent of the value of the federal credit
(this percentage is also called the “match rate”).
In tax year 2018, the maximum state EITC credit is about
$1,480.3
Massachusetts increased the match rate on January
1st, 2016 from 15 percent. In 2015, close to 440,000 tax filers in
Massachusetts claimed the state EITC, for a total of approximately
$134.4 million in tax credits under the older 15 percent match rate.
(For information on the number of state EITC claimants and the percent
of total tax filers claiming the state EITC by city and town, see the
Kids Count Data Center.) With the increase in the match rate to 23
percent, the state Department of Revenue estimates that the total value
of the EITC going into the pockets of low-income working families will
be close to $214.1 million in state Fiscal Year 2019. (To learn more
about this and other state funding affecting Massachusetts children,
see MassBudget’s Children’s Budget.)

Both the federal and state EITC are refundable. This
means that if the
value of the tax credit exceeds the amount owed in income tax, the
remaining credit value is refunded to the tax filer as a direct
payment.

EITC BOOSTS WORK HOURS AND
INCOMES, IMPROVES OUTCOMES FOR KIDS

The EITC is a useful tool in the fight against poverty. In combination
with the federal Child Tax Credit (CTC), nationally the federal EITC
kept approximately 8.1 million people out of poverty, including
approximately 4.4 million children.4

There has been extensive research looking into effects of the EITC on
parents and children.5
By providing tax credits to people
currently in the workforce, the EITC increases employment and
encourages people, especially single mothers, to work more hours. This,
in turn, boosts recipients’ long-term earnings and future
Social Security retirement benefits. The earnings boost provided by
this refundable tax credit also helps families in a variety of other
ways. For example, the EITC:

Improves the
health of
children and mothers. Researchers found that mothers who
received EITC
increases were more likely to receive prenatal care, less likely to
smoke or drink during their pregnancy, and more lively to deliver
babies with healthy birth weights. This finding was not related to
changes in health insurance coverage.

Boosts
academic performance.
Children in families receiving the EITC support have shown higher test
scores, especially for elementary and middle school students; higher
high school graduation rates; and higher college attendance rates. In
fact, according to research cited by the Center on Budget and Policy
Priorities, “a child in a family eligible for the largest
EITC expansion in the early 1990’s would have a 4.8
percentage-point higher probability of completing one or more years of
college by age 19—an improvement comparable to the effect of
major educational interventions such as reducing classroom
size.”

Increases the
earning
potential for future generations. Because children raised
in
EITC-supported households tend to grow up healthier and do better in
school, they also tend to earn more as working adults. In one study
“researchers projected that each dollar of income through tax
credits may increase the real value of the child’s future
earnings by more than a dollar.”

Increases
Social Security
benefits. By encouraging work and therefore increasing
direct earnings
during one’s career, the EITC also leads to stronger
retirement benefits, including Social Security benefits.